Sheikhs v shale
- since July high of almost $115, now near 40% plunge;
- the main culprits – oilmen of North Dakota and Texas – has boosted American’s oil production by a third;
- positives: equivalent to a 2% pay rise, global GDP should rise, reduce already-low inflation, encourage central bankers towards looser monetary policy;
- losers: oil producers including Russia, Nigeria, and Venezuela;
- Saudi Arabia’s stand: let the price fall and put high-cost producers out of business;
- Different economics of shale: can be drilled as little as possible, thus being less vulnerable to shocks or manipulation
The whole business becomes a bit more like manufacturing drinks: whenever the world is thirsty, you crank up the bottling plant.
E.ON and E.OUT
- Germany’s Energiewende, or “Energy transition”, aims to shut down all nuclear plants by 2022; before, renewable energies are heavily subsidized;
- E.ON announced a spin-off between its nuclear business and fossil fuels – not necessarily a creation of “bad utility” (“looking for investors who haven’t read a newspaper since the Energiewende began”): the new firm will be born debt-free and have provisions to cover the exit from nuclear power and shareholders could expect respectable cash dividends;
- Hostile regulatory environment not the only reason: energy sector is becoming more decentralized and making more use of data – GE and Siemens are investing to make grids smarter;
- On the other end, Germany cannot quit nuclear power while making a pell-mell exit from fossil fuels;
In a bind
Saudi Arabia, the leading member of OPEC, has made it clear it will tolerate lower prices in order to do the shale firms’ finances what fracking does to rocks.
- Two generalizations: the industry’s economics are good at almost any price (big independent firms, operating costs were $10-20 per barrel); it is far less clear if the industry can profitably invest in new wells to maintain or boost production (at $60, investment could drop by as much as half);
- another vulnerability: weak balance sheet; invest more than they earn, and increasing leverage;
- adversity may make shale stronger – it will prompt a new round of innovation, from cutting drilling costs through standardization to new fracking techniques that increase output;
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